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(October 13, 2010) Federal banking regulators this month cracked down on MetaBank, a major prepaid card issuer, an action that threw into question the pending initial public offering of prepaid card program manager NetSpend Corp.

Austin, Texas-based NetSpend is scheduled to price its long-planned IPO on Thursday, according to reports on the financial wires. But its close ties to MetaBank triggered rounds of speculation about whether the IPO will actually happen. A NetSpend spokesperson says he can’t comment.

On Tuesday, MetaBank’s parent company, Storm Lake, Iowa-based Meta Financial Group Inc., reported to the Securities and Exchange Commission that the Office of Thrift Supervision had taken enforcement actions against MetaBank. The OTS banned MetaBank from issuing any new loans under its iAdvance product as of Wednesday, and it also placed controls on its business of issuing loans in advance of customers’ receipt of tax refunds, so-called tax-refund anticipation loans.

“The OTS advised us on Oct. 6 that it has determined that the bank engaged in unfair or deceptive acts or practices in violation of [the Federal Trade Commission Act and OTS advertising regulations] in connection with the bank’s operation of the iAdvance program and required the bank to discontinue all iAdvance line-of-credit origination activity by Oct. 13, 2010,” Meta Financial’s filing says. The filing does not give details about what the OTS found at fault with iAdvance, which is a short-term loan product that MetaBank calls a “microloan” though some news reports call it a payday loan. MetaBank offers the service to NetSpend and other clients for whom it issues prepaid cards. The number of such loans and their total receivables were not immediately available. An OTS spokesperson refused to comment, and a Meta spokesperson referred a Digital Transactions News call to an executive who did not respond by late Wednesday.

The filing also says that due to Meta’s third-party relationship risk, other risks, and its rapid growth—growth the filing attributed to the expansion to its Meta Payment Systems processing division—the OTS was requiring it to get approval from its regional director before it could engage in various business activities. The company needs an OTS okay before it can enter into new third-party relationships, originate new tax-refund loans, or even offer income-tax transfers during the 2011 tax season.

In any event, Meta Financial said the discontinuance of iAdvance and the potential discontinuance of tax-related programs now subject to OTS approval would “eliminate a substantial portion” of Meta Payment Systems’ gross profit. Meta’s shares closed down 33% on Wednesday.

The possible problem for NetSpend is that it is so closely intertwined with MetaBank. NetSpend manages 2 million active prepaid cards, and MetaBank issues 71% of them, according to a filing the company made to the SEC last week in advance of the IPO. NetSpend holds 4.9% of Meta Financial’s equity, an action the program manager took “in order to further align our strategic interests with MetaBank,” NetSpend’s filing says.

Prepaid card researcher Tim Sloane of Mercator Advisory Group Inc. says he doubts iAdvance alone was a material part of Meta’s business, but he notes that only Meta and the OTS have the full details. “It might be the OTS is wrestling with how to manage prepaid in sponsoring banks, and in figuring that out, they’ve put these restrictions in place,” he says.

Investment bank Morgan Stanley issued a report Wednesday saying Meta’s woes amount to an endorsement of the strategy of NetSpend rival Green Dot Corp., which is in the processing of buying a bank. “Better to be in control of your own destiny,” Morgan Stanley said.

NetSpend plans to sell 2.27 million shares at $10 to $12 apiece, which would generate $22.7 million to $27.2 million before underwriting expenses. NetSpend’s current owners plan to sell 16.3 million shares.

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